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Government Green Procurement Spillovers: Evidence from Municipal Building Policies in California

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Government Green Procurement Spillovers: Evidence from Municipal Building Policies in California Government Green Procurement Spillovers: Evidence from Municipal Building Policies in California Timothy Simcoe Michael W. Toffel Working Paper 13-030 May 14, 2014 Copyright © 2012, 2013, 2014 by Timothy Simcoe and Michael W. Toffel Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. Government Green Procurement Spillovers: * Evidence from Municipal Building Policies in California Timothy Simcoe Michael W. Toffel Boston University School of Management Harvard Business School 595 Commonwealth Ave. Morgan Hall 497 Boston, MA 02215 Boston, MA 02163 (617) 358-5725 (617) 384-8043 [email protected] [email protected] May 14, 2014 ABSTRACT We study how government green procurement policies influence private-sector demand for similar products. Specifically, we measure the impact of municipal policies requiring governments to construct green buildings on private-sector adoption of the US Green Building Council's Leadership in Energy and Environmental Design (LEED) standard. Using matching methods, panel data, and instrumental variables, we find that government procurement rules produce spillover effects that stimulate both private-sector adoption of the LEED standard and investments in green building expertise by local suppliers. These findings suggest that government procurement policies can accelerate the diffusion of new environmental standards that require coordinated complementary investments by various types of private adopter. JEL Codes: L15, Q58, Q55, O33. Keywords: Public procurement, green building, quality certification, environmental policy. * We thank Melissa Ouellet and Mark Stout for their outstanding research assistance and Tom Dietsche for providing and interpreting data from the US Green Business Council. We gratefully acknowledge financial support from the Lee-Chin Institute at University of Toronto’s Rotman School of Management and the Division of Research and Faculty Development at the Harvard Business School. We appreciate helpful comments from Hunt Allcott, Ken Corts, Kira Fabrizio, Andrew King, and Marc Rysman and from participants at the Alliance for Research in Corporate Sustainability (ARCS) conference, the Strategy and the Business Environment conference, and seminars at Dartmouth’s Tuck School of Business and Indiana University’s Kelley School of Business. Governments often use their formidable purchasing power to promote environmental policy objectives. The US Environmental Protection Agency and the European Union, for example, have developed environmentally preferable purchasing guidelines for goods ranging from paint, paper, and cleaning supplies to lumber and electricity. Various state and local governments have taken similar steps.1 These procurement policies often have the stated goals of encouraging cost-reducing innovation among suppliers and spurring private demand for green products (Brander et al. 2003; Marron 2003). The European Union, for example, justifies its environmental procurement policy not only on the basis of leveraging government demand to “create or enlarge markets for environmentally friendly products and services” but also on the basis of stimulating “the use of green standards in private procurement” (Commission of the European Communities 2008: 2). To date, there has been little evidence on whether these targeted government procurement policies produce the intended spillover effects. This paper provides some initial evidence by measuring the impact of municipal green building procurement policies on the private-sector adoption of green building standards. We examine whether green building requirements that apply only to municipal buildings accelerate the use of green building practices by private-sector developers in the same geographic markets, as manifested by more rapid diffusion of the US Green Building Council’s Leadership in Energy and Environmental Design (LEED) standard for sustainable building practices. Our results show that the LEED standard diffuses more quickly among private-sector developers in cities that adopt a government green building procurement policy, as compared to a matched sample of non-adopting cities of similar size, demographics, and environmental preferences. We also find that government green procurement policies are associated with the growth of green building input markets, as measured by the number of local architects, 1 Many authors have discussed government procurement as a policy instrument. For example, see Johnstone (2003), Coggburn and Rahm (2005), Commission of the European Communities (2008), Michelsen and de Boer (2009), and National Association of State Procurement Officials and Responsible Purchasing Network (2010). For examples related to green procurement policies, see Clinton (1998), Commission of the European Communities (2008), Environmental Law Institute (2008), Patrick (2009), Rainwater (2009), National Association of State Procurement Officials (2010), and United Kingdom Office of Government Commerce (2010). 1 contractors, and other real estate industry professionals who obtain the LEED Accredited Professional designation. Finally, we show that green building procurement policies produce geographic spillovers. In particular, there is more LEED adoption by developers and real estate industry professionals in “neighbor cities”—those bordering a city that has adopted a green building policy—than among these neighboring cities’ own set of matched controls. The paper considers three mechanisms by which municipal green procurement policies could promote diffusion of the LEED standard within the private sector. First, government procurement policies might stimulate local demand for green buildings by raising awareness of buildings’ impact on the environment or legitimating a particular standard for measuring green building performance. Second, government procurement policies might lead to lower prices for green building inputs through some combination of increased entry by new suppliers, scale economies, and learning effects. And third, government procurement policies might solve a coordination problem in the market for green buildings. Specifically, if developers are waiting for key suppliers to invest in green building expertise, while those same suppliers are waiting for evidence of ample demand, municipal government procurement policies might jump-start the development of specialized input markets by providing a guaranteed source of demand for LEED-accredited professionals and other suppliers. While these three mechanisms are not mutually exclusive, our analysis suggests that green building procurement policies promote entry by input suppliers, thereby helping to solve coordination problems associated with joint adoption. In particular, we find no evidence that procurement policies had a larger impact in “greener” cities, which would have supported the theory that procurement policies increase awareness of the LEED standard, and would therefore produce a larger response in markets with greater latent demand for green buildings. We also find that procurement policy impacts are, if anything, somewhat larger in large municipalities. This contradicts the hypothesis that procurement policies cause incumbent green building input suppliers to reduce prices in response to learning, scale economies, or increased competition, 2 since we would expect these effects to be stronger in small markets where competition is weak and suppliers have not reached efficient scale. This leaves entry by new suppliers and solving coordination problems as two possible explanations for the spillovers we observe. We find that more new suppliers enter (by obtaining LEED accreditation) in markets where there is a local green building procurement policy. While we do not provide a direct test of the coordination hypothesis, the final step in our analysis uses instrumental variables to measure the causal impact of the supply of LEED Accredited Professionals on private developers’ LEED adoption rates and vice versa. There can only be coordination failures in LEED adoption if both effects are positive, which we find to be the case.2 Overall, our findings suggest that government purchasing policies can break deadlocks that emerge when coordinated investments are required to adopt a common standard, thereby stimulating the growth of private markets for the targeted goods and services. Related literature. This study contributes to four broad literature streams. First, we add to a nascent literature that characterizes how governments are increasingly incorporating environmental criteria into their procurement policies. Much of this work is descriptive. For example, Coggburn and Rahm (2005) and May and Koski (2007) describe the emergence of green building procurement policies within the US federal and state governments. McCrudden (2004) provides an historical context by recounting how governments have used procurement policies to promote a host of social objectives. Michelsen and de Boer (2009) and Sourani and Sohail (2011) identify both the barriers to implementing green building procurement policies and the capabilities that can overcome those barriers. Marron (1997) and Marron (2003) describe the potential impacts of government green procurement policies. We also contribute to a literature that examines the adoption and impact of green building practices. Kahn and Vaughn (2009) show
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